Opinion: The year the lid came off Hong Kong

HONG KONG (MarketWatch) — Hong Kong’s Hang Seng Index
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looks as if it could end 2014 pretty much where it started off. But this hardly tells the story of a year of acrimony, which may still go down as the turning point for the freewheeling ‘anything goes’ economy.

This was the year in which simmering discontent over governance finally boiled over into mass street protests after promises for fully open elections for the chief executive in 2017 were brusquely tossed aside by Beijing.

As the world’s media descended to record the months-long Occupy Central protests and related demonstrations, there was puzzlement as to why so many people would take to the streets in outwardly prosperous Hong Kong. But it did not take much digging to unearth the underlying discontent — a society now so starkly divided by inequality.

As Schulte Research put it earlier this year: “The harder they work, the more the Hong Kong people fall behind.”

At the core of this division is an official high-land-price policy amid a plutocrat class of super rich tycoons that makes real estate the most expensive in the world. Even with unemployment of 3.3%, Hong Kong has the greatest inequality in the developed world as measured by a Gini coefficient of 0.54.

Alongside this dubious honor are two other firsts that bring more shame than credit.

Hong Kong topped the tables of rankings of plutonomies, with billionaires’ net worth equal to 75% of GDP. A big part of this comes from five tycoons who made it onto the Forbes top 100 global rich list, all of whom made their wealth primarily by selling highly priced real estate to the city’s 7 million inhabitants.

At the same time, Hong Kong beat Russia into second place by a lengthy margin on the Economist magazine’s index of crony capitalism for 2014.

In any year, these studies might trigger the question: “Is something rotten in the heart of Hong Kong?” But as fate would have it, this year — and this month, in fact — guilty verdicts at the biggest corruption trial in Hong Kong’s history spelled out the establishment dysfunction for all to see.

This past weekend saw a former top government administrator and the scion of a leading property developer begin lengthy jail terms at Stanley Prison. Former government No. 2 Rafael Hui was sentenced to seven and a half years, and Thomas Kwok, former co-chairman of Sun Hung Kai Properties Ltd.
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to five years for their part in a graft scandal that dated back to 2000.

This trial exposed the collusive nature of the relationship between government and the city’s biggest property company by market value, striking a blow against Hong Kong’s reputation for supposedly developed-world governance standards.

For locals who have had to live with paying ever more for apartments that are getting ever smaller each year, these revelations only confirm what many had long suspected: The government and big business are actively rigging a property market to profit at their expense.

It has been clear for some years since the handover from British rule that the property market has become ever more favorable to the developer cartel. Plot ratios were raised, allowing ever-higher apartment blocks to be built, while government land was sold only in mega parcels that prevented all but the largest developers from competing.

You might expect that in the aftermath of a trial confirming graft at the heart of government, hurried action would follow to repair confidence or at least to ensure no repeat behavior. But no, not in Hong Kong.

Over the holiday period, Hong Kong Chief Executive C.Y. Leung was pictured making a relaxed call on Chinese President Xi Jinping Beijing, accompanied with warm words of support. Instead of recognition of past mistakes or the grievances in Hong Kong, all that came was a warning Beijing’s recipe for reform should be implemented more sternly.

To be fair, Hong Kong’s embattled leader is hardly in a position to lead calls for better governance or mend fences with those seeking democratic reforms. But this is not just because Beijing is calling the shots — it’s also due to his own unpopularity and personal predicament.

During the Occupy Central protest, it was revealed that Leung received a controversial payment from Australian group UGL
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worth about $6.4 million, which was not disclosed when he took office. This looks all the more embarrassing, given that a former chief secretary has just been found guilty of two counts of non-disclosure of payments.

Meanwhile, Leung will find it hard to live down comments made during a media interview that universal suffrage was unacceptable as it would give too many poor people a say in the choice of the chief executive.

With few signs of new attempts to heal the divisions at the root of Hong Kong society, more demonstrations and strife looks inevitable in 2015.

How long before overseas investors decide the governance risk in Hong Kong is just not worth it?

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